RESEARCH UNBUNDLING – ONE YEAR INTO MiFID II.
Rebecca Healey, EMEA Head of Market Structure and Strategy, Liquidnet.
The central aim of MiFID II has been to improve transparency over costs and charges related to financial instruments and services to deliver greater value to the end-investor. However, as we reach the first anniversary of implementation, it has become apparent that the industry is still evolving as it adjusts to unbundling research, particularly when taking into account different jurisdictions across the globe.
The discussion about the need to separate the provision of research and execution is not new – first coming to prominence nearly 15 years ago with the publication of the Myners report in 2004. But the value in research is evolving, spearheaded not only by regulation but also by the introduction of technology in the research process which has lead to significant changes in its production and consumption.
It is in this context that we spoke to 62 market participants performing a variety of roles across the globe – portfolio managers, traders, sellside, buyside and independent research providers – between August and November 2018 to try to better understand the implications of MiFID II on the unbundling of research and execution. It’s perhaps not surprising to learn that less than a year after the launch of MiFID II a key finding was that unbundling is already a global phenomenon, with 53 percent of buyside respondents having implemented a global policy and a further 20 percent planning to do so in the next five years.
Critics claim that unbundling research from execution will negatively impact research provision, particularly small- and mid-cap companies, threatening listings and secondary trading volumes in Europe. On the other hand, supporters believe this offers an opportunity to open up the research market and challenge the status quo regarding the implementation and execution of investment ideas.
The ability to access value-add research continues to matter. Headlines regarding the slashing of research budgets and culling of broker lists detract from the fact that as pricing becomes more transparent, firms are becoming more discerning regarding the type of research they consume, as well as their method of access. For example, we found that 77 percent of firms are using alternative sources of research to traditional written research.
Bulge brackets still dominate the top 10 research and broker lists with 69 percent of respondents choosing global investment banks over regional specialists or independents. However the future sustainability of their business model appears to be called into question. As the buyside revisit budgets and conduct broker reviews to select future providers of research, the sellside is having to make decisions regarding where to invest scant resources and which clients to continue to service.
Bulge bracket brokers are still assessing what they can expect to earn from the continued provision of research; attempts to lower the minimum waterfront entry point appear to have been underestimated in the hope of continued higher revenue analyst access. As transparency over cost and quality of research emerges, portfolio managers are not only becoming more selective regarding which analysts they access and what they are willing to pay, they are exploring new methods of accessing investment ideas as firms come under increasing pressure to lower operational costs.
Corporate access is a case in point where some asset management firms are now being excluded from broker roadshows as a result of declining commission payments. In response, these firms are now electing to engage directly with company investor relations departments. By altering how firms gain access, new challenges emerge; consumers require servicing and the companies that they invest in need to develop new methods on how to engage with investors, whether that is self-funded research or utilising new portals. The increased use of data via companies and quantitative tools to match investors with assets owners, rather than relying on a broker to act as an intermediary.
All of which is leading to changes in the production, access and distribution of investment ideas – and not just in Europe. While there is currently a split between payment from P&L for MiFID firms and clients’ money for non-MiFID business, as our research suggests the increasing focus on end clients is seeing a gradual adoption of research unbundling practices globally. Irrespective of their regulatory obligations in the US and APAC, some of the largest asset managers are looking to demonstrate their firm’s capability as a protector of client assets and are electing to pay for research from their own P&L, creating a knock-on effect for other non-EU managers and their providers of research.
Our conversations with the industry show that in a highly competitive environment, asset managers need to adapt investment strategies in response to factors such as globalisation, growing political risk and changing investor profiles. As part of this, the ability to access value-add research will continue to be critical. However, it is how this research is accessed, from whom, at what price point and in what format which is of critical importance. Maintaining the status quo is no longer an option as the industry looks set for a period of wholesale change. A point emphasised by Mike Bellaro, CEO of Plato Partnership, who supported our research. He said that as industry participants seek to differentiate in today’s competitive asset management industry, new alternatives emerge which will challenge the traditional provision of research and construction of investment ideas, and the emphasis on supplier differentiation and move to quality over quantity is now firmly underway.
Research unbundling is just the first step – the canary in the coalmine if you like – in achieving significant efficiencies for the buyside. As it becomes the norm firms are likely to start deriving significant benefits from the data they gather. The ability to track research providers, the type of research they provide and at what cost unlocks possibilities that weren’t previously available, all leading to increased value for end-investors.
This article is excerpted from Liquidnet’s December 2018 report “Canary in the Coalmine”